Op-ed article by President Charles Michel, WHO Director General Dr Tedros Adhanom Ghebreyesus and more than 20 world leaders |
The COVID-19 pandemic is the biggest challenge to the global community since the 1940s. At that time, following the devastation of two world wars, political leaders came together to forge the multilateral system. The aims were clear: to bring countries together, to dispel the temptations of isolationism and nationalism, and to address the challenges that could only be achieved together in the spirit of solidarity and cooperation, namely peace, prosperity, health and security.
Today, we hold the same hope that as we fight to overcome the COVID-19 pandemic together, we can build a more robust international health architecture that will protect future generations. There will be other pandemics and other major health emergencies. No single government or multilateral agency can address this threat alone. The question is not if, but when. Together, we must be better prepared to predict, prevent, detect, assess and effectively respond to pandemics in a highly coordinated fashion. The COVID-19 pandemic has been a stark and painful reminder that nobody is safe until everyone is safe.
We are, therefore, committed to ensuring universal and equitable access to safe, efficacious and affordable vaccines, medicines and diagnostics for this and future pandemics. Immunization is a global public good and we will need to be able to develop, manufacture and deploy vaccines as quickly as possible.
This is why the Access to COVID-19 Tools Accelerator (ACT-A) was set up in order to promote equal access to tests, treatments and vaccines and support health systems across the globe. ACT-A has delivered on many aspects but equitable access is not achieved yet. There is more we can do to promote global access.
To that end, we believe that nations should work together towards a new international treaty for pandemic preparedness and response.
Such a renewed collective commitment would be a milestone in stepping up pandemic preparedness at the highest political level. It would be rooted in the constitution of the World Health Organization, drawing in other relevant organizations key to this endeavour, in support of the principle of health for all.  Existing global health instruments, especially the International Health Regulations, would underpin such a treaty, ensuring a firm and tested foundation on which we can build and improve.
The main goal of this treaty would be to foster an all-of-government and all-of-society approach, strengthening national, regional and global capacities and resilience to future pandemics. This includes greatly enhancing international cooperation to improve, for example, alert systems, data-sharing, research, and local, regional and global production and distribution of medical and public health counter measures, such as vaccines, medicines, diagnostics and personal protective equipment.
It would also include recognition of a “One Health” approach that connects the health of humans, animals and our planet. And such a treaty should lead to more mutual accountability and shared responsibility, transparency and cooperation within the international system and with its rules and norms.
To achieve this, we will work with Heads of State and governments globally and all stakeholders, including civil society and the private sector. We are convinced that it is our responsibility, as leaders of nations and international institutions, to ensure that the world learns the lessons of the COVID-19 pandemic.
At a time when COVID-19 has exploited our weaknesses and divisions, we must seize this opportunity and come together as a global community for peaceful cooperation that extends beyond this crisis. Building our capacities and systems to do this will take time and require a sustained political, financial and societal commitment over many years.
Our solidarity in ensuring that the world is better prepared will be our legacy that protects our children and grandchildren and minimizes the impact of future pandemics on our economies and our societies.
Pandemic preparedness needs global leadership for a global health system fit for this millennium. To make this commitment a reality, we must be guided by solidarity, fairness, transparency, inclusiveness and equity.
By J. V. Bainimarama, Prime Minister of Fiji, Prayut Chan-o-cha, Prime Minister of Thailand; António Luís Santos da Costa, Prime Minister of Portugal; Mario Draghi, Prime Minister of Italy; Klaus Iohannis, President of Romania; Boris Johnson, Prime Minister of the United Kingdom; Paul Kagame, President of Rwanda; Uhuru Kenyatta, President of Kenya; Emmanuel Macron, President of France; Angela Merkel, Chancellor of Germany; Charles Michel, President of the European Council; Kyriakos Mitsotakis, Prime Minister of Greece; Moon Jae-in, President of the Republic of Korea; Sebastián Piñera, President of Chile; Andrej Plenković, Prime Minister of Croatia; Carlos Alvarado Quesada, President of Costa Rica; Edi Rama, Prime Minister of Albania; Cyril Ramaphosa, President of South Africa; Keith Rowley, Prime Minister of Trinidad and Tobago; Mark Rutte, Prime Minister of the Netherlands; Kais Saied, President of Tunisia; Macky Sall, President of Senegal; Pedro Sánchez, Prime Minister of Spain; Erna Solberg, Prime Minister of Norway; Aleksandar Vučić, President of Serbia; Joko Widodo, President of Indonesia; Volodymyr Zelensky, President of Ukraine, Dr Tedros Adhanom Ghebreyesus, Director-General of the World Health Organization.
Compliments of the European Council.
The post “COVID-19 shows why united action is needed for more robust international health architecture” first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Washington, DC / Brussels: The International Monetary Fund (IMF) today received the European Union (EU)’s contribution of SDR 141 million (equivalent to €170 million or US$199 million) to the Catastrophe Containment and Relief Trust (CCRT), which provides grants for debt service relief to countries hit by catastrophic events, including public health disasters such as COVID-19.
Jutta Urpilainen, European Commissioner for International Partnerships, said: “Through this contribution to the CCRT, Team Europe continues to stand in solidarity with its most vulnerable partners. In this difficult period, the resources freed up can provide social services for the most vulnerable people, such as access to essential healthcare and education for young people, including girls. Team Europe’s Global Recovery Initiative is working to provide debt relief and sustainable investment for the SDGs.”
“The EU’s generous contribution of €183 million is critical to help the world’s most vulnerable countries cope with the impact of the COVID-19 crisis and continue providing health care, economic and social support for their people. I am grateful to the EU and its member states for their support and strong partnership. I urge other countries to contribute to the CCRT so we can in turn support our most vulnerable member countries,” IMF Managing Director Kristalina Georgieva noted.
This disbursement is part of the EU’s overall contribution of €183 million (SDR152 million or US$215 million) to the CCRT. It finances grants for the third tranche of CCRT debt service relief that was approved by the IMF´s Executive Board on April 1, 2021.
The EU stands ready to disburse its remaining grant contribution in support of additional debt service relief in the context of potential future CCRT tranches. With this contribution, the EU, together with the EU institutions and its Member states, has committed more than half of the current CCRT pledges.
Together with the third tranche, the IMF has provided about SDR519 million (about US$736 million or €626 million) in grants for debt relief to all 29 CCRT-eligible members since the pandemic began in early 2020. The purpose of the debt relief initiative under the CCRT is to free up resources to meet exceptional balance of payments needs created by the disaster rather than having to allocate those resources to debt service.
Background
The CCRT provides grants to pay debt service owed to the IMF by eligible low-income member countries that are hit by the most catastrophic of natural disasters or battling public health disasters—such as the COVID-19 pandemic.
CCRT-eligible countries are those eligible for concessional borrowing through the IMF’s Poverty Reduction and Growth Trust (PRGT) and whose annual per capita gross national income level is below $1,175. Vulnerable countries most seriously affected by the COVID-19 crisis benefit from the CCRT.
The EU, as a global player, can help integrate debt relief into a broader policy dialogue, financing strategies and actions, in order to ‘build back better.’
This €183 million contribution is fully in line with Commission President von der Leyen’s proposal for a Global Recovery Initiative that links investments and debt relief to the Sustainable Development Goals.
The beneficiaries of the third CCRT tranche are Afghanistan, Benin, Burkina Faso, Burundi, Central African Republic, Chad, Comoros, Democratic Republic of the Congo, Djibouti, Ethiopia, The Gambia, Guinea, Guinea-Bissau, Haiti, Liberia, Madagascar, Malawi, Mali, Mozambique, Nepal, Niger, Rwanda, São Tomé and Príncipe, Sierra Leone, Solomon Islands, Tajikistan, Togo and Yemen.
For More Information
Links:
IMF Executive Board Approves 3rd CCRT Tranche: Paper and Press Release
Factsheet on CCRT:
https://www.IMF.org/en/About/Factsheets/Sheets/2016/08/01/16/49/Catastrophe-Containment-and-Relief-Trust
Q&As on CCRT:
https://www.IMF.org/external/np/fin/ccr/index.htm
Compliments of the IMF.
The post IMF | Global Recovery: The EU Disburses SDR141 Million to the IMF’s Catastrophe Containment and Relief Trust first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Opinion article by Eurogroup President, Paschal Donohoe |
Comparison is inevitable at moments of great challenge. The wisdom of former US president Theodore Roosevelt that “comparison is the thief of joy”, comes to mind in contrasts between the size of stimulus packages and the strength of economic forecasts.
Comparisons diminish the significant and historic efforts taken to boost our economies, and to develop and rollout vaccines at unprecedented speed. The 27 countries of the EU have stood together, ensuring that those most economically affected have been supported and that all member states have access to vaccines. These co-ordinated efforts are supporting tens of millions of people.
This unity may come at a short-term cost to the largest and strongest members of our union, but they and all others benefit from our unity in the longer term. We have learnt over the centuries of the deep linkages across our continent and the reality that one country’s growth at the expense of its neighbours is not sustainable.
To this end, in 2020 alone, Europe implemented budgetary supports equal to 7 per cent of gross domestic product and liquidity supports of 17 per cent of GDP, while the US stimulus figures were 10 per cent and 7.7 per cent. There is a difference, but it is not as significant as suggested by some. Critically, a focus on scale understates the size and transformational nature of the support being provided, particularly for the EU economy.
Important differences exist. The EU has chosen to focus its response on protecting employment through job-retention schemes to keep people in work, rather than relying on direct transfer payments. American state and local governments, which have had to cut spending as, unlike the federal government they must balance their budgets, have laid off 1.3m employees. Europe has maintained public service jobs.
This is because the EU’s supportive fiscal policy stance, combined with the suspension of fiscal rules and the establishment of a temporary framework for state aid, have allowed governments to put in place unprecedented levels of budgetary support. The three European safety nets, including SURE which has committed €100bn to protect workers against the risk of unemployment, complement national responses.
The monetary policy decisions and forward guidance from the European Central Bank, which have preserved favourable conditions for the economy, are indispensable. The measures taken have protected millions of jobs and livelihoods, and cushioned the impact of the pandemic crisis on companies. Their positive effect can be seen in how the rise in unemployment has been contained compared with the drop in economic activity.
In addition to these supports, the EU’s Next Generation package and Recovery and Resilience Facility will result in a further €750bn in spending beginning this year. This initiative, an emergency grants and loan programme funded by temporary common debt, would have been unthinkable before the pandemic.
Eurozone finance ministers are united in the approach that until the health crisis is over and recovery firmly under way, we will protect our economy with the necessary support. The US economy is forecast to return to pre-pandemic levels in 2021 while the EU’s is forecast to do so by 2022. A year is a long time in the grim duration of this disease.
In response, we have agreed a supportive budgetary stance in the euro area for 2021 and 2022, the importance of which is reinforced by the increased coronavirus public health restrictions announced in recent days.
Actions are important, but their success is all that really matters to the citizens we serve. The speedy implementation of the RRF, and additional national measures, will lead our economies through the Covid-19 crisis. The reality is that most growth forecasts do not recognise the full impact of the RRF or the national measures. Moreover, every day we see more people being vaccinated, and we expect to have over 300m vaccines in Europe by May — a vital step towards normality.
But there is no room for complacency; urgency is paramount. European economic efforts last year were unprecedented, yet fresh and demanding challenges approach. We understand this. We are determined to rise to them.
Analogies of a contest may persist, but this is not a race to the largest stimulus package. It is the outcomes that matter, the livelihoods saved and living standards recovered. The fact that the budget stimuluses in the US and Europe are double those of the 2008 global financial crisis shows that the participants realise the deadly seriousness of the challenge.
Compliments of Eurogroup.
The post Eurogroup| To compare the EU and US pandemic packages misses the point first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Twelve no or only nominal tax jurisdictions1 began their first tax information exchanges today under the Forum on Harmful Tax Practice’s (FHTP) global standard on substantial activities. The standard ensures that mobile business income can no longer be parked in a low tax jurisdiction without the core business functions being carried out from that jurisdiction and that the countries where the parent entities and beneficial owners are tax resident get access through regular exchanges of information.
These new annual exchanges cover information on the identity, activities and ownership chain of entities established in no or only nominal tax jurisdictions that are either non-compliant with substance requirements or engage in intellectual property or other high-risk activities.
“Today’s first exchanges of information on the previously unknown operations of entities in low tax jurisdictions, are good news for tax administrations around the world, as they will now have regular access to information on the activities and income of entities in low tax jurisdictions that are held or controlled by their taxpayers,” said Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration.
The exchanges will enable receiving tax administrations to carry out risk assessments and to apply their controlled-foreign company, transfer pricing and other anti-base erosion and profit shifting provisions.
The FHTP is monitoring both the legal and practical implementation of the standard by no or only nominal tax jurisdiction through a rigorous, annual peer review process under Action 5 of the OECD/G20 Inclusive Framework on BEPS. The next annual results will be released in December 2021.
For more information, visit: www.oecd.org/tax/beps/beps-actions/action5/
Compliments of the OECD.
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The three European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) issued today their first joint risk assessment report of 2021. The report highlights how the COVID-19 pandemic continues to weigh heavily on short-term recovery prospects. It also highlights a number of vulnerabilities in the financial markets and warns of possible further market corrections.
Macroeconomic conditions improved in the second half of 2020, supported by ongoing fiscal and monetary policy efforts, but the resurgence of the COVID-19 pandemic since the last quarter of 2020 has led to increasing economic uncertainty. The start of the rollout of vaccinations provides a crucial anchor for medium-term expectations, but insufficient production capacities, delays in deliveries as well as risks related to mutations of the virus are weighing heavily on short-term recovery prospects.
Macroeconomic uncertainty was generally not reflected in asset valuations and market volatility which have recovered to pre-crisis levels, highlighting a continued risk of decoupling of valuations from economic fundamentals.
In light of these risks and uncertainties, the ESAs advise, national competent authorities, financial institutions and market participants to take the following policy actions:

Prepare for an expected deterioration of asset quality: banks should adjust provisioning models to adequately address the impact of the economic shock of the pandemic and to ensure a timely recognition of adequate levels of provisions. They should engage to restructure over indebted but viable exposure efficiently. To supervisors, banks’ provisioning policies should continue to be a point of particular attention;

Continue to develop further actions to accommodate a “low-for-long” interest rate environment and its risks: while low interest rates are important to support economic activity, they negatively impact banks’ interest income and remain the main risk for the life insurance and pension fund sector. For insurers, it is important that the regulatory framework also reflects the steep fall in interest rates experienced in recent years and the existence of negative interest rates. Financial institutions should also continue to monitor, and be prepared for, changes in interest rates, especially in light of the recent upward shifts of long-term interest rates and the consequent concerns about re-emerging inflationary pressures;

Ensure sound lending practices and adequate pricing of risks: banks should continue to make thorough risk assessments to ensure that lending remains viable in the future, and this should be closely monitored by supervisors. Banks should continue to make thorough risk assessments to ensure that lending remains viable, including after public support measures such as loan moratoria and public guarantee schemes will expire;

Follow conservative policies on dividends and share buy-backs: any distributions should not exceed thresholds of prudency; and

Investment funds should further enhance their preparedness in the face of potential increases in redemptions and valuation shocks: to this end the alignment of fund investment strategy, liquidity profile and redemption policy should be supervised, as well as funds’ liquidity risk assessment and valuation processes in a context of valuation uncertainty.

Background
The three ESAs cooperate regularly and closely to ensure consistency in their practices. In particular, the Joint Committee works in the areas of supervision of financial conglomerates, accounting and auditing, micro-prudential analyses of cross-sectoral developments, risks and vulnerabilities for financial stability, retail investment products and measures combating money laundering. In addition, the Joint Committee also plays an important role in the exchange of information with the European Systemic Risk Board.
The Joint Committee is the forum for cooperation between the European Banking Authority (EBA), European Securities and Markets Authority (ESMA) and European Insurance and Occupational Pensions Authority (EIOPA), collectively known as the ESAs.
Compliments of the European Securities and Market Authority (ESMA).
The post ESMA | EU Financial Regulators War of an Expected Deterioration of Asset Quality first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Blog post by Philip R. Lane, Member of the Executive Board of the ECB |
In this blog post, I will provide an overview of the inflation outlook, based on the latest ECB staff macroeconomic projections for the euro area. To set the scene, I first review the current economic situation before turning to the analysis of inflation dynamics during the pandemic.
Previewing the main messages, my assessment is that the volatility of inflation during 2020-2021 can be largely attributed to the nature of the pandemic shock: the increase in inflation during 2021 can be best interpreted as the unwinding of disinflationary forces that took hold in 2020 and does not constitute the basis for a sustained shift in inflation dynamics. The medium-term outlook for inflation remains subdued and closing the gap to our inflation aim will set the agenda for the Governing Council in the coming years.
The economic situation
The near-term economic situation continues to be dominated by high uncertainty amid the ongoing race between the roll-out of vaccination campaigns and the spread of the virus. The contraction in the fourth quarter of 2020 was milder than expected, reflecting the strong global recovery in the latter part of last year, some success in containing the pandemic and learning effects in maintaining economic activity in the presence of lockdowns. Manufacturing has held up especially well, supported by foreign demand, as indicated by the strong value of the March flash purchasing managers’ index for manufacturing. Even in the harder-hit services sector, the lockdown damage has been far less than it was during the first wave last spring.
However, the still-high level of infections, the risks posed by virus mutations and the associated prolongation of containment measures continue to weigh on euro area economic activity, especially in services, with GDP likely to have contracted again in the first quarter of this year. The further extension of lockdown measures will leave an imprint on activity in the second quarter, although the vaccination campaigns are expected to gain traction in the coming weeks.
The March ECB staff projections foresee the economic recovery gaining momentum in the second half of the year as the medical situation improves and economic restrictions are eased, with output growing at a rate of 4.0 per cent in 2021, 4.1 per cent in 2022 and 2.1 per cent in 2023. Factoring in the impact of the recently adopted American Rescue Plan of the US Administration under President Joe Biden would give euro area activity a meaningful cumulative boost of 0.3 per cent of GDP over the projection horizon. However, the expectation in the baseline that GDP will reach its pre-pandemic level only in the second quarter of 2022 testifies to the vast accumulated cost of the pandemic (Chart 1).
The large uncertainty associated with the effects of the pandemic shock is captured by the mild and severe alternative scenarios developed by ECB staff. Under the mild scenario, the pre-pandemic level of activity is reached as early as the third quarter of this year; under the severe scenario, the restoration is delayed to late 2023. Of course, the 2019 output level just serves as a convenient benchmark – a full calculation of the aggregate output cost of the pandemic should take into account the pre-pandemic expected growth path over 2020-2022.

Chart 1
Selected (B)MPE projections for real GDP growth(chain linked volumes, Q4 2019 = 100))
Sources: ECB and Eurosystem broad macroeconomic projections exercise.

Inflation dynamics
Given the sudden nature of the onset of the pandemic but its ultimately temporary nature, it should be no surprise to also see considerable volatility in inflation. As shown in Chart 2, there were substantial declines in the inflation rate over the course of 2020 (dipping into negative territory in the final months), but these are set to be largely reversed during 2021. Looking through these fluctuations, the average inflation rate over 2020 and 2021 is projected to be 0.9 per cent, which is quite close to the 2019 level.

Chart 2
Selected (B)MPE projections for inflation(annual percentage changes)
Sources: ECB and Eurosystem broad macroeconomic projections exercise.Notes: The dotted line refers to the projected average of inflation during the two years 2020 and 2021.

The volatility in inflation over 2020 and 2021 can be attributed to a host of temporary factors that should not affect medium-term inflation dynamics.
First, as shown in Chart 3, the pandemic has been associated with a significant cycle in oil prices, which fell from around USD 70 at the start of 2020 to below USD 20 in late April 2020 and subsequently recovered to around the January 2020 levels; in EUR terms, the variation was slightly less pronounced due to the 6 per cent appreciation of the euro against the US dollar over this period. Under the current oil price assumptions embedded in the staff projections, this profile will generate significant base effects in energy price inflation in 2021. In addition, the introduction of a carbon surcharge on prices of liquid fuels and gas in Germany in January 2021 also contributed materially to the rebound in energy price inflation.

Chart 3
Oil price developments(price per barrel)
Source: ECB.Notes: The latest observation is for 26March 2021.

Second, the pandemic also constituted a major asymmetric shock, involving a reallocation of consumer spending across different categories, with a collapse in expenditure on tourism, travel and hospitality, in contrast with an increase in expenditure on home-related items (including groceries and equipment needed for working, learning and exercising at home). This switch in expenditure intersected with sector-specific supply restrictions to exert a significant influence on relative price dynamics. In addition, since the price index is reweighted each January to take into account the composition of expenditure in the previous year, the 2021 HICP index assigns more weight to sectors that experienced a surge in expenditure (and thereby higher pricing pressure) in 2020 compared to sectors that suffered a sharp drop in expenditure (and thereby lower pricing pressure) (Chart 4).[1] This reweighting of the price index alone accounted for 0.3 percentage points of the increase in HICP inflation in January.
It is also plausible that the relative price movements in the pandemic had a net impact on aggregate inflation due to a convexity effect.[2] To the extent that some production inputs cannot be adjusted quickly, production functions will exhibit convex marginal costs, due to diminishing returns. In this situation, the price increases for those items experiencing a surge in demand will be larger than the price declines for those items experiencing a drop in demand: this convex pattern is evident in the cross-section of prices shown in Chart 5 and may have contributed to some “missing disinflation” during 2020, given the relatively limited decline in overall inflation compared to the drop in overall expenditure. This convexity pattern is not likely to be persistent: to the extent that the shift back to normal expenditure patterns is anticipated, demand-supply mismatches should be less severe. More generally, supply effects induced by the renewed lockdowns do not appear to be exerting upward pressure on inflation to the same extent as last spring. This is consistent with considerable adaptation and learning effects over the last year in negotiating the impact of the pandemic on production.

Chart 4
Changes in HICP inflation rates and weights(x-axis: change between the expenditure shares used in January 2021 HICP and those used in January 2020 HICP; y-axis: scaled change in annual inflation rates between January 2021 and January 2020)
Sources: Eurostat and ECB staff calculations.Notes: The inflation rates shown are scaled by the standard deviation of year-on-year changes in annual rates from January 2012 to December 2019. Dots that have been labelled are in dark blue. The size of the dots is scaled according to the weights used in January 2021 HICP. The latest observation is for January 2021.

Chart 5
Changes in demand and prices for goods and services(x-axis: year-on-year change in consumption expenditure in Q3 2020; y-axis: change in inflation from January to November 2020 over standard deviation 2018-19)
Sources: Eurostat and ECB calculations.Notes: Only items for which inflation and quantities move in the same direction are shown. For the methodology on the consumption expenditure series, please see ECB (2020), “Consumption patterns and inflation measurement issues during the COVID-19 pandemic”, Economic Bulletin, Issue 7. Domestic flights and package holidays are excluded. The latest observations are for the third quarter of 2020 for consumption expenditure and for November 2020 for inflation.

Third, some governments (most notably Germany) implemented temporary VAT reductions that temporarily pushed down inflation in the second half of 2020 but have temporarily raised inflation in 2021 as these schemes come to an end. VAT-related base effects on HICP inflation will be particularly significant in the second half of 2021.
Fourth, inflation volatility has also been generated by the rescheduling of seasonal sales. For example, clothing and footwear sales were brought forward from January to December in Germany and postponed in Italy and France.[3] Together, such shifts imparted a large boost to the annual rate of inflation of non-energy industrial goods (NEIG) in January (to 1.5 percent from -0.5 percent), even though these have partially unwound in February with an easing back in NEIG inflation to 1.0 percent.
Finally, uncertainty surrounding the signal for price pressures is further compounded by a larger degree of price imputations, since lockdown measures interfere with the usual collection of prices for some categories.
Looking through this short-term volatility, the projected medium-term inflation rate remains subdued amid still-weak demand and substantial slack in labour and product markets: the staff projections see headline annual inflation easing back to 1.2 per cent in 2022 and only reaching 1.4 per cent in 2023. Similarly, core inflation is projected to rise only very gradually from 1.0 per cent in 2021, 1.1 per cent in 2022 and 1.3 per cent in 2023. This pickup in inflation is based on the gradual reabsorption of slack in labour and product markets, in line with the recovery in overall demand and the fading out of the adverse temporary supply effects related to the pandemic and its containment measures. In turn, the recovery in overall demand is supported by our accommodative monetary policy as well as expansionary fiscal policies at national and EU levels. In comparative terms, the projected inflation path remains well below both the pre-pandemic inflation outlook (as reflected, for example, in the December 2019 staff projections, in which inflation was projected to be 1.6% in 2022, 0.4% higher than in the March 2021 projections) and the Governing Council’s inflation aim.
The impact of extensive slack on inflation dynamics is consistent with projected employment dynamics. The current state of the labour market is heavily shaped by the array of pandemic-related fiscal supports to firms and workers, such that the underlying prospects for employment and earnings remain highly uncertain. Although the increase in unemployment has been limited despite the vast pandemic shock, the headline unemployment figure masks considerable migration from employment straight into inactivity on the one hand and the life-support provided by the extensive job retention measures on the other (Chart 6).
The elevated uncertainty about job prospects also points to vulnerabilities ahead. Consistent with this, wages are expected to remain moderate in 2021, with wage negotiations having been widely postponed. Inactivity also damages labour productivity through the loss of current on-the-job knowledge. While the experience after the global financial crisis suggests that the wage Phillips Curve remains intact, the generation of sustained wage pressures requires a labour market that is sufficiently hot, which will require a reabsorption of a considerable amount of labour market slack.[4] Moreover, the elevated uncertainty about future employment and wage dynamics is likely to constrain consumer spending.

Chart 6
Unemployment (left panel) and unemployment expectations (right panel)
Sources: Eurostat, European Commission, national sources, and ECB calculations.

The trajectory also hinges on the speed with which the spectacular rise in the savings rate during the pandemic will be normalised. While savings over the past year have partly reflected diminished consumption opportunities and partly precautionary motives, it is reasonable to expect some boost to consumption due to catch-up effects, especially in relation to activities such as restaurant meals or recreational travel. At the same time, it is plausible that households smooth out any additional consumption over time and the pandemic shock may motivate households (especially in the most-affected euro area countries) to hold some precautionary buffers. In addition, the asymmetric distribution of these savings across the population matters for the propensity to dissave after the pandemic: older and wealthier households have fared much better than younger households but the former have a lower propensity to consume (Chart 7).[5]

Chart 7
Household financial situation and savings(change in percentage balance January 2020 – February 2021)
Sources: European Commission DG-ECFIN and ECB calculations.Notes: The revision in household financial situation and their ability to save is proxied by the change in net balances between January 2020 and February 2021.

Turning to investment, business sentiment and expectations beyond the near term have brightened. At the same time, the sustained loss of income in the sectors most affected by social restrictions has weakened corporate balance sheets, and uncertainty about the prospects for different sectors in the economy remains pronounced. In relation to investment, firms remain likely to delay or cancel some of their capital expenditure plans against the background of heightened uncertainty about future demand for their products, spare capacity and weakened balance sheets. The significant slack in product markets may also restrain the ability of firms to raise prices, despite the desire to rebuild profit margins from their currently-compressed levels.
A high level of domestic demand (consumption, investment, government spending) is an important factor in determining overall pricing pressures, since it is plausible that the domestic inflationary pressures from these sources are stronger than from foreign demand. This is reflected in the history of euro area inflation rates, which shows a low-frequency negative correlation between the euro area trade surplus and inflation.[6]
In terms of global cost-push shocks, there are some upward pressures from higher raw material prices and bottlenecks in some sectors (including semiconductors and freight). These are expected to be temporary (reflecting mismatches between supply and demand in the initial phase of a recovery) and are also partly directly offset by the euro appreciation over the last year. More generally, the goods that are produced using such intermediate inputs do not represent a sufficiently-large proportion of the overall consumption price index for such cost push shocks to play a dominant role in determining inflation dynamics. For instance, using input-output matrices, ECB staff estimates suggest that the 38 per cent increase in global basic metal prices that occurred between June 2020 and January 2021 would only add about 1.5 per cent to economy-wide output prices: moreover, this should be interpreted as an upper bound since it neglects general equilibrium effects and assumes that the surge in prices is fully permanent. Moreover, the impact on consumer prices (compared to output prices) is likely to be rather low, since the sectors most affected have low consumption shares, except perhaps for certain electrical and transport-related consumer products. In addition, to the extent that the pass-through to output prices and consumer prices occur only gradually, the impact on the annual inflation rate in any one year will be attenuated. With the same caveats, another example is provided by the 355 per cent increase in freight costs from China to the euro area over the same period: this is simulated to generate a mechanical impact of 0.3 per cent to euro area output prices. This reflects that such a shock has a quantitatively very limited impact for most sectors, with non-negligible impacts only for some IT, textiles and transport-related products. This indicates that the likely impact in turn on consumer prices would be overall very limited.
The US Administration’s American Rescue Plan will bring positive spillovers to the euro area, even if the impact on euro area output and inflation is limited by the relatively-low trade linkages between the euro area and the United States. Holding all other factors constant, model-based simulations indicate that its peak impact via trade and financial linkages on euro area annual inflation will be about 8 basis points in 2023, although any excessive pressure on long-term nominal yields would diminish the net impact.
Longer-term inflation expectations
While the analysis so far has focused on the level of aggregate economic slack as a constraint on inflation dynamics, it is also important to recognise that inflation outcomes are also shaped by economy-wide expectations about future inflation. In particular, the subdued level of inflation in the euro area in recent years can, in part, be attributed to the weakening in expected inflation on account of the persistence of below-target inflation outcomes.
Of course, there is no single rate of expected inflation, in view of the different ways inflation beliefs are formed by households, firms and financial traders. It is also important to take into account that beliefs are formed not only about the expected inflation rate but also the distribution of future inflation rates, including the tail risks of extremely-low or extremely-high inflation rates.
Market-based indicators of inflation compensation have increased from historic lows in recent weeks. In large part, this can be attributed to a less pessimistic global outlook, mainly related to the news about substantial US fiscal stimulus and the strong global recovery in manufacturing, trade and oil prices. In particular, the tail risk of extremely-low (or even negative) inflation outcomes has diminished, so that investors require greater compensation to hold longer-term nominal bonds, given the shift in the distribution of inflation outcomes. Of course, the recovery relative to the pandemic trough should not obscure the overall profile by which measures of inflation compensation are clearly subdued by historical standards and still at a significant distance to the ECB’s inflation aim.
Analysis of the recent evolution of some reference measures of market-based inflation compensation shows that similar but more pronounced upward moves were observed in the United States, with inflation expectations in advanced economies exhibiting a striking correlation with the price of oil. In line with this, sizeable co-movements between longer-term market-based measures of inflation compensation across jurisdictions are the norm, rather than the exception. Importantly, estimates suggest that this is not so much due to variation in the “true” inflation expectations embedded in these indicators, but primarily on account of a co-movement in risk premia (Chart 8).

Chart 8
Euro area 5y5y inflation-linked swap rate and the inflation risk premium(percentages per annum; percentages)
Sources: Refinitiv and ECB calculations.

In relation to the inflation beliefs of financial market participants, we do not rely solely on market-based indicators but complement our assessment with lower-frequency survey-based measures, such as the quarterly ECB Survey of Professional Forecasters (SPF). Survey-based measures of inflation expectations over the longer-term (for 2025) remained steady at 1.7 per cent in the ECB SPF in the first quarter of 2021.[7] It is also important to recognise the strong influence of the persistent component of inflation outcomes on beliefs about future inflation: for instance, Chart 9 shows the correlation between the average of past inflation outcomes and the evolution of long-term inflation expectations in the SPF.

Chart 9
Euro area average inflation and longer-term inflation expectations(percentages per annum)
Sources: ECB calculations.

Analysing the full set of inflation expectations across the range of economic actors (financial market participants, firms, households) is a demanding exercise.[8] For instance, it is likely that firms and households do not revise beliefs as quickly as financial investors because of informational constraints and the logic of rational inattention on the part of many households and firms in relation to cyclical fluctuations in the macroeconomic environment.[9]
The implications of a divergence in the dynamics of inflation beliefs between financial investors and participants in the real economy (households and firms) can be illustrated with model-based simulations (Chart 10). Using the ECB-BASE model, an ECB staff analysis compares the impact on macro-financial outcomes of a generalised improvement in inflation expectations to the impact if only the beliefs of financial investors are revised.[10] In the former case, the improvement in inflation expectations has a self-fulfilling positive impact on inflation outcomes and stimulates output through the reduction in the inflation-adjusted real interest rate, despite the tightening in longer-term nominal yields stemming from an increase in term premia. In contrast, if only financial investors revise inflation beliefs, nominal yields and term premia increase but the real economy faces higher real interest rates, since the nominal tightening is not offset by an improvement in the inflation beliefs of household and firms. Under this scenario, the net impact is a contraction in output and a decline in the projected inflation path.
This analysis suggests that it is important to study carefully the evolution of inflation beliefs across all sectors of the economy. In particular, the heterogeneity across individual households and firms. suggests that significant shifts in average inflation expectations are likely to occur only gradually over time. At the ECB, the pilot Consumer Expectations Survey promises to enrich our understanding of the dynamics of inflation expectations among households across the euro area. To the extent that the inflation beliefs of financial traders are revised more quickly than the inflation beliefs of firms and households, this analysis also explains why monetary policymakers pay attention to the speed of yield curve movements, in addition to the underlying fundamentals and the interconnections between the yield curve and broader inflation developments.

Chart 10
Macro-financial implications of higher longer-term inflation expectations
Source: ECB calculations based on ECB-BASE model and the analysis by Matthieu Darracq-Paries and Srecko Zimic in ECB (2021, forthcoming) Economic Bulletin op. cit.
Notes: In all simulations we assume 0.1 increase of long-term inflation expectations. Monetary policy and the exchange rate are kept unchanged. The scenarios vary according to the perception of the shock across the various agents. In red: all agents perceive the shock (benchmark case). In yellow: all agents, except the household sector, perceive the shock. In blue: only the financial sector perceives the shock.

Conclusion
In summary, the volatility of inflation during 2020-2021 can be largely attributed to the nature of the pandemic shock: the increase in inflation during 2021 can be best interpreted as the unwinding of disinflationary forces that took hold in 2020 and does not constitute the basis for a sustained shift in inflation dynamics.
The medium-term outlook for inflation remains subdued, amid weak demand and substantial slack in labour and product markets, with the staff projections foreseeing only a very gradual increase in price pressures: inflation is projected to reach only 1.4 per cent by 2023, well below the Governing Council’s inflation aim. Accordingly, in terms of the ECB’s price stability mandate, the pandemic shock continues to pose ongoing risks to the projected path of inflation.
Against this background, ensuring favourable financing conditions is fundamental to restoring inflation momentum and guiding the formation of inflation expectations through the commitment of the central bank to counter the negative pandemic shock to the inflation path and secure convergence towards the inflation aim over the medium term. Looking ahead, it is also vitally important that fiscal support is maintained and that the euro area fiscal response to the unfolding of the pandemic and the requirements for a strong recovery is appropriately calibrated.
Offsetting the negative pandemic shock to the inflation outlook is only the first stage of the monetary policy challenge. Even after the disinflationary pressures caused by the pandemic have been sufficiently offset (with a lead role for the pandemic emergency purchase programme), we will have to ensure that the monetary policy stance delivers the timely and robust convergence to our inflation aim. Our ongoing monetary policy strategy review will provide timely input into meeting this challenge.
Author:

Philip R. Lane, Member of the Executive Board of the ECB

Compliments of the European Central Bank.
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Charles Michel, President of the European Council |
Good afternoon, President Biden. Thank you for accepting our invitation. We are delighted to welcome you today. It’s not common practice for the European Council to host foreign guests at our regular meetings. The last time was 11 years ago.  It was your good friend, Barack Obama.
In Washington, it might not be clear what the European Council does. As you know, the European Council is the gathering of the 27 EU Heads of State and Heads of Government, each responsible to their own people and parliaments. This group is the strategic hub of our Union.  And we decide on the orientation for our European project.
Mr President, you know well the challenges of bi-partisanship. Just imagine, partisanship times 27! Because 27 Member States.
Yet, most importantly, in the European Council, day after day, we forge our unity. By consensus. We decided here to become the first climate neutral continent by 2050. We decided here on our historic 1.8 trillion Covid recovery plan. On top of our national stimulus plans.
It is here, for example, that we determine the EU’s policy towards China, Russia and Turkey. And after the US elections, we discussed what your Presidency would mean for our transatlantic relationship. We are united in our assessment. This is a historic opportunity to re-energise our cooperation. And deepen our historic bond.
Since your election, we have talked a lot about you. Now we are happy to talk directly with you. America is back. And we are happy you are back.
Today, Covid-19 is the top priority.  No one is safe until everyone is safe. We must join forces to defeat the virus.
This includes working closely together on vaccines. To boost production and delivery, and ensure open supply chains. We will be the major producers of vaccines — to protect our people, and people around the world. So we must also lead efforts — through the COVAX Facility — to make sure vaccines reach all countries.
We have all the tools — science, ability, resources, and the collective will. By standing together, shoulder-to-shoulder, we can show that democracies are best suited to protect citizens, to promote dignity, and to generate prosperity.
The shock caused by the pandemic must be a wake-up call.  And we must build back better and smarter. That’s why the European Union has undertaken a fundamental twin transformation, with our Green Deal and our Digital Agenda. We were the first bloc to commit to climate neutrality by 2050. And others have followed. Your decision to bring America back to the Paris Agreement is wonderful news. It’s music to our ears. And we support the Earth Day summit you will convene next month.
In digital, we also want to lead by example. And avoid abusing our data resources like we have abused our natural resources. We believe people will not accept the over-exploitation of their personal data. Whether by companies in pursuit of profit. Or by states for the purpose of controlling their citizens. This is neither sustainable for business, nor for democracy.
We need a wise framework, where our digital resources will be used for innovation and economic development. And we must also protect the “environment” of our democracies and our individual freedoms. This is a complex and exciting challenge. Let’s frame this digital democratic standard together.
After the atrocities of WW II, we worked together to build the rules-based international order. We created the United Nations and other international institutions.
And for several decades, this rules-based order was challenged by the Soviet Union. They imposed their own rules and threatened with brutal force those who resisted. When the Soviet empire fell, we believed in the so-called “End of History” … the final victory of democracy. Indeed, democracy expanded. Free markets progressed. More countries joined the multilateral system.
But thirty years later, we know we were wrong about the general victory of liberal democracy. Authoritarian tendencies morphed into new models. They abused or bent the rules, using new tools (disinformation, cyber, and hybrid threats) to attack democracies, both from outside and from within. These new regimes threaten democracy, human rights and the rules-based order. At least as much as the Cold War regimes.
This is why NATO remains the cornerstone of our collective peace and security. And we Europeans are determined to assume our fair share of the burden. More than ever, it is up to America and Europe, with our like-minded partners, to promote the democratic model and free market economy.
What we do together today will determine the world our children and grandchildren will live in, tomorrow. That’s why yesterday we were pleased to host Secretary Blinken and discuss geopolitical topics like China, Russia, Iran or the Horn of Africa, Western Balkans, Eastern Partnership.
Let’s band together — to build a fairer, greener and more democratic world. Anchored in our common history. The EU is a peace project. If we live in peace, freedom and prosperity today it is because 76 years ago, countless Americans landed on our shores. They fought for our freedom, justice, and democracy.  And so many died — in the name of liberty. The Battle of the Bulge, in my home country, lives on still today in the hearts and minds of families. This binds us forever.
Let’s build on this friendship — to forge a new transatlantic mind-set. A strong basis for our renewed cooperation. Thank you again for joining us this evening. And for sharing your thoughts on our future cooperation.
Compliments of the European Council.
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The European Commission has disbursed €13 billion to six EU Member States in the sixth instalment of financial support under the SURE instrument. This is the third disbursement in 2021. As part of today’s operations, Czechia has received €1 billion, Belgium €2.2 billion, Spain €4.06 billion, Ireland €2.47 billion, Italy €1.87 billion and Poland €1.4 billion. This is the first time that Ireland has received funding under the instrument. The other five EU countries have already benefitted from loans under SURE.
These loans will assist Member States in addressing sudden increases in public expenditure to preserve employment. Specifically, they will help Member States cover the costs directly related to the financing of national short-time work schemes, and other similar measures that they have put in place as a response to the coronavirus pandemic, including for the self-employed. Today’s disbursements follow the issuance of the sixth social bond under the EU SURE instrument, which attracted a considerable interest by investors.
So far, 17 EU Member States have received a total of €75.5 billion under the SURE instrument in back-to-back loans. An overview of the amounts disbursed up to date and the different maturities of the bonds are available online here.
Overall, the Commission has proposed that 19 EU countries will receive €94.3 billion in financial support under SURE. This figure includes the additional €3.7 billion proposed by the Commission today for six Member States. The full amounts per Member State are online here. Member States can still submit requests to receive financial support under SURE which has an overall firepower of up to €100 billion.
To address Member States’ pending requests for 2021, the Commission will seek from the market further €13-€15 billion in the second quarter of 2021.
Later this year, the Commission is due to also launch the borrowing under NextGenerationEU, the recovery instrument of €750 billion to help build a greener, more digital and more resilient Europe.
Members of the College said
President Ursula von der Leyen said: “The crisis is tough on many workers, who fear for their jobs. This is why we have created SURE, to mobilise €100 billion in loans to finance short-time work schemes across the EU. Today we are disbursing a new tranche of €13 billion under SURE, supporting workers and companies in six Member States. This helps protect jobs and enables economies to recover faster from the crisis.”
Commissioner Johannes Hahn, in charge of Budget and Administration, said: “We are well in track to help business and people coping with these hard times. We have already delivered three fourths of the money committed for the SURE programme. Additional money will follow soon the second quarter.”
Commissioner Paolo Gentiloni, Commissioner for Economy, said: “As the effects of the pandemic continue to weigh on our economies, today the Commission is disbursing further significant financial support to six countries, including Ireland for the first time. This is a crucial contribution to national efforts to support workers through these difficult times. I’m proud of the European success story that is SURE.”
Background
On 23 March 2021, the European Commission issued the sixth social bond under the EU SURE.
The issuing consisted of two bonds, with €8 billion due for repayment in March 2026 and €5 billion due for repayment in May 2046.
The bonds attracted a strong demand from a wide range of investors, which ensured good pricing conditions that the Commission is directly passing on to the beneficiary Member States.
The bonds issued by the EU under SURE benefit from a social bond label. This provides investors in these bonds with confidence that the funds mobilised will serve a truly social objective.
Compliments of the European Commission.
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